The challenge with over-financialisation is that price signals get confused in the market. We are trying to make prices mean too many different things. And there gradually is some kind of misallocation. This is probably something not studied deeply enough in economics because it’s always been glossed over in the assumptions about free markets.
We often think only about the demand and supply sides of free markets, but never quite about the income side. The assumption is that incomes then unlock the demand back in the free market. Yet the income side of the equation also changes the underlying demand. A society that has higher concentration of wealth will have a different demand profile than one that has lower concentration of wealth.
Not to mention that different regulations and rules will divert income and wealth in different ways. Countries with stricter labour regulations can have higher unemployment, but wages can also tend to be higher, and that gives rise to a broader middle class while also resulting in labour-based services commanding higher prices, and changing the value of goods vis-a-vis services.
The philosophy to leave things to the market isn’t neutral per se. We cannot make a conscious decision to say this or that should be left to the market and then disclaim the negative consequences of it. Once we institute a market, or any other policies, we ought to recognise the presence of winners and losers, and then the overall system needs to deal with the shortfall of the system.
In the HDB for example, the government seeks to ‘subsidise’ housing for the BTO flats but allow secondary ‘resale’ transactions to be ‘priced’ by the market. Yet this pricing is subject to forces such as private housing prices, which is in turn related to land sales and also buying power from foreign capital. This means that as much as we try to create the two-track market to ensure locals have access to affordable housing, it is subject to forces on the other side. Ultimately, the tension is political – with so much wealth of the people locked in real estate, can the government or the political parties allow for massive collapse in real estate value to ‘reset’ costs for a younger generation?
And if not, how can we ensure that intergenerational wealth transfers do not massively handicap those who do not receive them? Do we then intervene in the market? I would think that the market continues and should be part of the whole suite of allocation mechanisms available for policy-makers but treating it like the default approach for allocation of everything would be wrong.